Many people dream of being able to retire early. However, there are concerns that this could lead to financial difficulties with some not having the funds they need for a longer than expected retirement.
To mitigate the risk of this, it’s important to develop a strategy to help provide you with peace of mind and a financially secure retirement. While it may be tempting to dip into a pension pot early to assist, there are downsides of doing this.
To provide guidance on efficient retirement planning, Financial Planner, Omar Din at Azets Wealth Management has explored the key considerations below.
Overview of retirement planning
The basis of planning ahead for the end of your career is to ensure you can do so with confidence that your finances are secure, and you are able to have the retirement you had hoped for.
Essentially, a strategy to replace or supplement your earned income or utilising assets in a way that maximises their value provides a strong foundation. Making the best use of pensions and other savings is a critical step.
Early retirement certainly bears thinking about, although it may be enticing. Before acting, it is always a good idea to take financial advice and think carefully about the following factors:
Do you know how much you’ll need to live comfortably in retirement?
If so, do you have enough in your pension pot for the lifestyle you want?
Do you have savings or any other source of income?
Do you still have a mortgage or any other outstanding debt you are still liable for?
Could working for just a few more years offer you valuable financial security?
Risks of accessing pension early
Research shows that accessing your pension before reaching State Pension age can reduce your pot by 59% on average. Another concern which people are being warned against is reducing their pension contributions in response to the challenging economic landscape.
In a similar vein, it is advised that over 55s don’t start raiding their pension pots as another means of combating any financial pressure they may be facing. There are fears that this will result in them having less income in the future, if people withdraw lump sums or start taking income sooner than planned.
Difficulty re-entering workforce
According to research from the Centre for Ageing Better, out of work over-50s are two times more likely to be out of work for a year or more than their younger counterparts, therefore compounding the issue for those who have retired early and realised their pension pot may not have the amount required for their extended retirement.
Pension changes to consider
One of the announcements in March 2023’s Budget that was met positively in some quarters was the abolition of the pensions lifetime allowance (LTA) charge. However, in somewhat of a surprise turn, a policy paper was published by the Government on 18 July which has added an important caveat for those who inherit a pension from someone who dies before the age of 75.
Scheduled to take effect on or after 6 April 2024, the inheritance of an appropriate pension pot would now be subject to income tax. In many cases this will be at the recipient’s marginal rate.
This would have a far reaching impact and mean an increased tax charge for a number of individuals across the UK. 75 or under is a relatively young age at which to die these days, so in many cases this will be an additional tax burden for relatives, at a time when they are grieving the untimely loss of a loved one.
More information in relation to this impending change to inherited pensions is explored here.
The role of an experienced advisor
At Azets Wealth Management, we can help create a retirement plan that works for you, through understanding your financial goals and assisting you in planning for the future.
We can develop strategies for taking an income from or keeping control of your pension pot, or a combination of both. Pensions are just one part of planning for retirement, we will provide advice to take advantage of all planning opportunities for structuring wealth.
We are here to help
For further information on retirement planning or to discuss your specific situation, please get in touch with a member of our specialist Wealth Management Team – hello@azetswealthmanagement.co.uk
Azets Wealth Management is a trading name of Azets Wealth Management Limited, which is authorised and regulated by the Financial Conduct Authority. Azets Wealth Management Limited is a subsidiary of Azets Holdings Limited.